What does the term 'inventory turnover' indicate?

The term 'inventory turnover' primarily indicates how often inventory is sold and replaced during a specific period, usually measured annually. A high inventory turnover ratio signifies that a company is efficiently managing its inventory, selling its goods quickly, and minimizing holding costs. This is critical for maintaining cash flow and reducing the risks associated with unsold inventory.

Understanding inventory turnover is vital for supply chain and operations management as it provides insights into sales performance, inventory efficiency, and overall business agility. Companies seek to optimize their inventory turnover to ensure they are not overstocked or understocked, thereby balancing supply with customer demand effectively.